IBDP Economics HL – Macroeconomics – Economics of inequality and poverty -Paper 1 Exam Style Practice Questions
Economics of inequality and poverty Paper 1?
Exam Style Questions..
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Exam Style Question for IBDP Economics HL- Economics of inequality and poverty -Paper 1
Question
Explain how government spending might promote greater equity in an economy.
▶️Answer/Explanation
Answers may include:
- definitions of government spending, equity
- Lorenz curve diagram showing a Lorenz curve shifting closer to the line of perfect income equality because of government spending to promote equity (or a subsidy diagram or an AD/AS diagram showing increasing AD and real GDP and therefore implying increased employment)
- explanation of the linkages between government spending (eg on merit and public goods, transfer payments and subsidies), taxation and equity
- examples of actual government spending measures (eg healthcare services, education, sanitation, water supplies, public parks, public transportation, old age pensions, unemployment benefits, child allowances) that have promoted equity.
Question
Evaluate the view that government policies to promote greater equity will always have a negative effect on efficiency.
▶️Answer/Explanation
Answers may include:
- definitions of efficiency, equity
- an AD/AS diagram to show LRAS shifting to the left (less efficiency) or to the right (greater efficiency), an externalities diagram to show government policies improving allocative efficiency, a supply and demand diagram to show welfare loss due to government policies to promote equity
- explanation of how government spending and taxation might adversely impact efficiency (eg through the disincentive effects of progressive taxation, transfer payments, subsidized goods and services, through the decrease in social surplus due to taxes and price ceilings)
- examples of government policies having either a negative or positive impact on efficiency
- synthesis and evaluation (evaluate).
Evaluation may include: consideration of the hypothetical trade-off between equity and efficiency, consideration of how government spending on socially desirable goods and services (eg health care services, education, sanitation, clean water supplies) might positively impact efficiency in the utilization of the economy’s resources in the long run (eg through poverty reduction and human capital formation) and in the short run (eg through the positive impact of government spending on AD), consideration of how automatic stabilizers might improve efficiency in the utilization of the economy’s resources in the short run (eg through the positive impact on AD during recessions), consideration of how certain kinds of government spending and taxation may increase allocative efficiency (eg through the increased consumption of merit goods and decreased consumption of demerit goods), government provision of merit goods may be less efficient than private provision, consideration of the word “always”, consideration of the meaning of the word “equity” (eg the difference between equity in the distribution of income and equality in the distribution of income, equity as equality of opportunity), consideration of the meaning of the word “efficiency” (eg productive and allocative efficiency in microeconomics, efficiency in the utilization of the economy’s factors of production in macroeconomics).
Question
Explain how the Lorenz curve and the Gini coefficient are used to measure differences in income inequality between countries.
▶️Answer/Explanation
Answers may include:
- definitions of income inequality, Lorenz curve, Gini coefficient
- Lorenz curve diagram(s) with one Lorenz curve that is closer to the line of perfect income equality and another Lorenz curve that is further away from the line of perfect income equality
- explanation of why a Lorenz curve closer to the line of perfect income equality (Gini coefficient closer to zero) indicates higher income equality and/or explanation of why a Lorenz curve further away from the line of perfect income equality (Gini coefficient closer to 1) indicates lower income equality
- examples of countries with a relatively equal (e.g. Sweden, Denmark) and relatively unequal (e.g. Brazil) distribution of income.
Question
Discuss the view that taxation is the most effective means of achieving equity in the distribution of income.
▶️Answer/Explanation
Answers may include:
- definitions of taxation, equity, distribution of income
- diagram(s) showing the Lorenz curve shifting closer to the line of perfect income equality and/or the effect of imposing taxes on a market
- explanation of why progressive taxation may increase the income equality in a country; explanation of why other government policies may also increase the income equality in a country
- examples of progressive taxes in practice, examples of alternative policies that will make the distribution of income in a country more equal (e.g. subsidized health care services, subsidized education, subsidized utilities, old age pensions, unemployment benefits, child allowances)
- synthesis or evaluation (discuss).
Discussion may include: consideration of the meaning of the word “equity”; the difference between equity in the distribution of income and equality in the distribution of income; a consideration of whether it is the most effective means of achieving equity; the effect on equity/equality depends on the type of taxation – progressive (direct) taxation tends to decrease equality/equity while regressive (indirect) taxation may decrease equality/equity; taxation is a major source of government revenue; taxation may be used to discourage the consumption and production of goods with negative externalities; too much taxation may discourage hard work and entrepreneurship; government expenditures on human and physical capital formation may have positive effects on economic growth in the long run; transfer payments may improve the quantity and quality of human capital but may also decrease the incentives to look for employment and to work hard or study; government expenditures and transfer payments may lead to budget deficits and high levels of indebtedness.